Bitcoin is a virtual
currency, or technically known as cryptocurrency,
which is not controlled by any centralized system and is not subject to any
rules or regulations of a central banking authority or any national government.
There are numerous cryptocurrencies in active use today, but Bitcoin is by
far the most popular and massively used. It is also used as payment for
services performed or to pay outstanding debts. It is exchanged for other
currencies, both traditional and virtual, on electronic exchanges similar to
forex exchanges. Unfortunately, due anonymity attached to holder’s information,
it is also being used for illegal activities, such as buying and selling of
illegal drugs on “dark web” marketplaces. It has a very robust and sophisticated
system (code) in place for its security. Anyhow, since it is a currency, it
affects the banking system. Through this paper we will analyse the pro’s and cons
of Bitcoin for banking system.
Over the past few
years Bit coin has been gaining a lot of attention of world. By the end of
2015, this cryptocurrency turned out to be the world’s best performing currency
by gaining 35% in just 12 months. Conventionally, transactions between two
parties have functioned under a centralised system, meaning that an independent
intermediary body sits between two parties (usually the banks of the two
parties) to securely process the payment. Unvaryingly, this intermediary body
is a central bank. The technology behind bitcoin operates via decentralised
system. This means that a transaction between two parties is direct and count
on multiple reliable copies of the ledger that is distributed to a huge network
of bitcoin users around the globe, who are witness to any changes. This makes
the ledger undoubtedly more secure and less prone to nefarious manipulation
which is difficult to control in a centralised system, in which there is only
one central agency which securely records all the transactions. As digital
currencies are emerging, the predilection for a decentralised system of payment
is increasing and would eventually make bank
redundant as an intermediary body. Since no body controls the information
related to transactions in bitcoin, it can be used to illegally launder money
out of the country. Central banks can not
track all the economic activities. With no surcharge on bitcoin
transactions, it is pushing for lowering the credit/debit card transaction
charges which would be a direct hit to
banks revenue. As the volatility of Bitcoin increases, transactions in nationalised
currencies decreases affecting the operations of banks. With the increase in
use of bitcoins it portrays the declining trust of people in regulated
currencies. Bitcoin transactions are irreversible,
and no alteration can be made once the transaction has been done. This makes it
impossible to correct or reverse any mistaken transaction. As transaction is
recorded when a copy of it reaches every user. Now imagine everyone using
bitcoin and all of them receiving reports of all transactions happening in the
world, which seems like impossible! It does not stand the test of scalability.
is beneficial for banking industry in several ways. Bitcoin is beneficial for
banks when used as an investment service,
similar to an ETF, provided they are allowed to trade bitcoins legally. this will help reduce bitcoin’s
volatility and provide banks a source of fee revenue. Bitcoin according to its creators and supporters can
eliminate the issue of inflation as
it will adjust according to the demand and supply. If banks are legally allowed
to trade or to make transactions in bitcoins, then banks can use the speed and cost efficiency of bitcoins
and save on its input cost of working. Bitcoin provides better accessibility with secure terminal for
transactions in those part of world where banking system is not robust enough.
The anonymity associated with the user is boon as well as bane. It gives its
customer privacy of transactions It performs. It also eliminates the exchange rate problem between various
currencies of country. As the economies of the world are not fully integrated,
currencies continually fluctuate making it difficult to trade in commodities
overseas. Bitcoin is also leading a new era of banking with technological revolution in the method
of transactions occur around the world. This puts forward future to the banking
industry which is more integrated, comprehensive, secure and efficient.
Bank for International Settlements (BIS), jointly owned by the world’s leading
central banks, noted in November that bitcoin could disrupt the ability of
central banks to exert control over the economy, as well as issue money.
Although such concern was explicitly based on the assumption that “widespread
adoption” would first be required, the BIS warned that digital currencies could
present “a hypothetical challenge to central banks, not through replacing a
central bank with some other kind of central body but mainly because it reduces
the functions of a central body and, in an extreme case, may obviate the need
for a central body entirely for certain functions”. Banks such as the US Federal Reserve and Bank of England
are taking measures to maintain stability and security within financial
systems. Although banks are the foremost critic of cryptocurrencies, they are
ones who are investing the most in block chain transactions which is making
cryptocurrency stronger. It shows even though cyber currency poses a possible
threat to banks, banks know where the future of banking industry lies. They are
working together towards replacing this unauthorised and unregulated currency
with their own cyber currency. Will this venture of their be successful or not,
only time will tell.
International Banker. (2018). The Impact of
Bitcoin on Central Banks. online Available at:
10 Jan. 2018.
Jain, Y. (2018). 5 Impacts of Bitcoin on
Economy, Banking & Finance. online Newgenapps.com. Available at:
Accessed 5 Jan. 2018.
Coin Desk. (2018). UBS: Banks Could ‘Absorb
the Benefits’ of Bitcoin. online Available at:
Accessed 5 Jan. 2018.
Anon, (2018). online Available at:
Accessed 5 Jan. 2018.
Copyright 2019 - Education WordPress Theme.